10 fresh con­cerns about the stock mar­ket from Gold­man Sachs

Financial Mirror (Cyprus) - - FRONT PAGE - By Jon C. Ogg

Gold­man Sachs Group Inc. (NYSE: GS) is of­ten con­sid­ered to be the most in­flu­en­tial bro­ker­age firm on Wall Street. Af­ter all, it al­most ex­clu­sively caters to the wealthy in­vestors and in­sti­tu­tions, out­side of its re­tire­ment as­set and money man­age­ment op­er­a­tions. So, should in­vestors be con­cerned when the mighty firm has down­graded its weight­ings for eq­ui­ties?

Gold­man Sachs low­ered its eq­uity weight­ing to Un­der­weight for the next three months. 24/7 Wall St. would point out that there are ef­fec­tively ten points that mat­ter here for eq­uity in­vestors.

There is no as­sur­ance that Gold­man Sachs is cor­rect in its views. Note that Gold­man Sachs still has many in­di­vid­ual stocks with Buy rat­ings, and it has not dis­banded its Con­vic­tion Buy list. It also has main­tained a Neu­tral view for stocks over the com­ing 12-month pe­riod.

It was no­ticed that the credit sec­tor — bonds to you and me — re­mained as Over­weight in this weight­ings ef­fort. Gold­man Sachs noted less-neg­a­tive asym­me­try ver­sus eq­ui­ties, which ef­fec­tively means that lower rates will last for longer — ditto for the na­tions with neg­a­tive rates.

One key is­sue that should be noted is that global eq­ui­ties are now said in its note to be trad­ing at the high-end of what was called a “fat and flat range.” This sim­ply means weaker than ex­pected earn­ings growth and high val­u­a­tions.

A se­cond is­sue to con­sider, which is re­it­er­ated from above, is that Gold­man Sachs is still not even pos­i­tive on eq­ui­ties in the longer term. For a 12month hori­zon, Gold­man Sachs just has a “neu­tral” weight­ing on eq­ui­ties.

A third con­sid­er­a­tion is that Gold­man Sachs ef­fec­tively is telling its cus­tomers to ex­pect no sig­nif­i­cant re­turn on their money. They kept an Over­weight weight­ing in cash. Cash earns no money, and you never hear about a great rally in the cash mar­ket.

Fourth is that some of the con­tin­ued ex­cite­ment has been around in­ter­na­tional is­sues, which might not be right. Stim­u­lus in China and un­cer­tainty in Europe come at the same time as a dovish Fed­eral Re­serve. Height­ened prospects of po­ten­tial in­ter­na­tional shocks re­main a risk.

A fifth risk pointed out is what would hap­pen if there is an exit to the eq­uity sec­tor. This would be deemed as painful for in­vestors who seek mul­ti­ple as­set classes be­cause there would be very few places to go, with bond yields be­ing so low.

Sixth, the cur­rent ex­pec­ta­tion is of even more cen­tral bank eas­ing, at the same time that there is sup­port from bet­ter mar­ket fun­da­men­tals. In short, what if the Fed’s hint last week about the down­side risks be­ing di­min­ished means it ac­tu­ally starts to raise in­ter­est rates again?

A seventh is­sue is the valu­a­tion tie of stocks and bonds. They have ral­lied to­gether in a race for yield, and Gold­man Sachs wor­ries that this has driven in­flated val­u­a­tions on both classes si­mul­ta­ne­ously.

The eighth is­sue is that Gold­man Sachs is call­ing for at least a mar­ginal rate hike in 2016. It sees the Fed at a 65% chance of a rate hike this year. That is at 20% for Septem­ber and a 45% chance for De­cem­ber.

A ninth is­sue is that Gold­man Sachs is cur­rently ex­pect­ing a 25 ba­sis point rate cut from the Bank of Eng­land. It also ex­pects quan­ti­ta­tive eas­ing mea­sures, like bond buy­ing and per­haps cor­po­rate pur­chases, as well as ex­tend­ing the funds for lend­ing in­cen­tives.

And num­ber 10, Gold­man Sachs ex­pects the Euro­pean Cen­tral Bank to an­nounce in its quan­ti­ta­tive eas­ing mea­sures that it will ex­tend as­set pur­chases through the end of 2017.

Maybe there is some over­lap here. Maybe Gold­man Sachs is wrong. The real is­sue is that all the ex­pec­ta­tions point to a con­tin­ued weak or­ganic growth sce­nario for the econ­omy. Ei­ther way, there were even more is­sues brought up by the firm when it down­graded the eq­ui­ties weight­ing.

Some ex­tra food for thought aside from the brought up in this down­grade: - Jeff Gund­lach has more or less said to sell ev­ery­thing. - S&P 500 is trad­ing at 17.8 times for­ward earn­ings, af­ter it peaked at 18 times, and the av­er­age is closer to 16.5.

- U.S. GDP rose only 1.2% in the se­cond quar­ter (ver­sus 2.6% ex­pected), and the first quar­ter’s fi­nal GDP was re­vised lower to a gain of 0.8% from 1.1%.

- Wor­ries of a div­i­dend chase bub­ble: Van­guard’s $31 bln Div­i­dend Growth Fund was just closed off to new in­vestors, ad­mit­ting in­flows were get­ting hard to man­age with­out com­pro­mis­ing on com­pet­i­tive long-term re­sults.


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